Activity growth to sharply decelerate in 2023, from a high starting point
Economic growth will cool sharply in 2023 owing to a high base of comparison, and as inflation remains elevated and credit conditions further tighten (from 1.75% up to September 2021 to 12% in December 2022). This situation will also dent household consumption (71% of GDP), implying a lower expansion rate, albeit the roughly 3% real increase in the minimum wage. Gross fixed investments (19% of GDP) are also expected to weaken amid tighter financing conditions and lower activity growth perspectives. In addition, mining investments could also be affected by the tax reform approved in November 2022, which, among other measures, created a surcharge for the oil and coal sectors, based on international prices. Finally, export growth is also set to lose steam amid expected lower global growth (including in its main trade partner, the US) and as agriculture (coffee, banana, palm and palm oil), and energy (oil and coal) prices register some marginal easing (albeit remaining at durably historically high levels).
Twin deficits to narrow, but to remain at elevated levels
The large current account deficit is expected to improve somewhat in 2023, driven by a smaller trade deficit (-4.4% of GDP in 2021). The strong deceleration in domestic activity will take a toll on imports, which should prevail over expected slower foreign sales growth. Similarly, the primary income deficit (-2.7% of GDP) should also narrow due to lower foreign investors’ repatriated income. Meanwhile, the services deficit should remain broadly similar to 2022 (the tourism surplus could be affected by lower global growth, but freight costs are set to moderate). Finally, the secondary income surplus (3.4% of GDP) should reduce, as remittances coming from the US and Spain weaken, assuming a deterioration in their job dynamics. On the financing side, rebounding FDI should not fully cover the external account shortfall. The country will continue to rely on more volatile sources (such as portfolio investments) to close the gap. This is particularly worrisome amid higher global risk aversion and the ongoing retightening of monetary policy in developed markets. Gross external debt stood at 51.4% of GDP in September 2022, with 57% public owed and 43% private owed. Moreover, non-resident holding of local-currency government bonds equals 8% of GDP. On the other hand, the government can count on a Flexible Credit Line with the IMF of roughly USD 9.8 billion (USD 5.4 billion withdrawn in 2020), which was renewed for two years in April 2022. Furthermore, in November 2022, foreign exchange reserves stood at USD 57 billion (covering approximately 8 months of imports).
Regarding the fiscal account, in November 2022, Petro´s ruling government was able to persuade Congress to approve a tax reform which aims to collect an additional 1.4% of GDP during its first year in force in 2023. Legislation changes include higher tax rates for high-income earners, for companies involved in mining activities, and on soft drinks, among others. In parallel, policymakers are also seeking to obtain the equivalent of a further 1.8% of GDP by combating tax evasion over the next four years. The reform aims to fund social projects and help improve Colombia’s fiscal account. Overall, fiscal consolidation in 2023 will be partly offset by higher financing costs.
Colombia elects its first leftist government
The leftist Gustavo Petro took office on 7 August 2022 for a four-year term, after winning the runoff in the presidential elections with 50.5% of the ballots against the independent Rodrigo Hernández, who polled 47.3% of the votes. Petro became Colombia´s first left-wing president. He is an economist and previously served as a Senator and as Mayor of Bogota. Dissatisfaction with high inequality, poverty, as well as demands to improve security in cities and fight violence in rural areas, where illegal armed groups dedicated to drug trafficking operate is likely to have contributed to his victory. Nonetheless, he has already undergone a drop in his approval rating, from 56% in August 2022 to 48% in December 2022. Petro’s Pacto Histórico coalition hold 19 seats in the Senate (out of 108 seats) and 25 seats in the Lower House (out of 172 seats), which requires negotiation skills in order to move forward with reforms. Overall, left-wing parties have 36% of the Senate, right-wing parties control 49% and centrists 19%. In the Lower House, the right wing is the largest group (45%), followed by the left (34%) and then by centrists (21%). Petro advocates in favour of halting new oil projects due to environmental concerns. Moreover, the approved tax reform would help to finance his plans for education (such as progressively ensuring access to public and quality education at technological and university levels) and healthcare (i.e., guarantee the right to healthcare through a single, public, universal, preventive, predictive, participatory, decentralized and intercultural system). Additionally, the government intends to reform labour and pension system laws in 2023. Regarding foreign policy, Petro has also worked on restoring diplomatic ties with Venezuela, which were severed in 2019. He has discussed topics such as trade, migration and security with Nicolas Maduro. Furthermore, regarding security, Petro, who was part of the M-19 guerrilla group in his youth, defends the full implementation of the 2016 FARC peace deal and the demobilisation of the still-operational ELN rebels to improve security and rural development. In December 2022, the government and the ELN announced the completion of a first round of talks.